Mullany's departure from DMC linked to resistance to further cost-cutting

The departure of Detroit Medical Center CEO Joe Mullany has raised concerns that cost-cutting mandated by the hospital system's corporate parent could deepen.

Joe Mullany was replaced this week as CEO of Detroit Medical Center partly because he refused to lay off more employees the past two years, negotiated a contract with Wayne State University medical school that paid doctors too much for administration, and spent more to fix problems with dirty surgical instruments than the DMC's parent company wanted, people familiar with the situation told Crain's.

The moves have raised concerns that further cost-cutting may be on the way and that budgets for capital spending and maintenance could be on the chopping block at the Detroit-based hospital system, the state's largest provider of Medicaid and indigent care.

Mullany, who the sources said may have delegated authority too much and bucked his bosses at Dallas-based Tenet Healthcare Corp., is also one of the first of several top corporate executives to be cut in a national restructuring plan at Tenet. The plan to cut corporate overhead costs calls for Tenet to reduce the number of its markets and regions from 13 to 10 or fewer, sources said.

Tenet and DMC officials declined to comment or address reasons why Mullany has been replaced by Tony Tedeschi, M.D., an executive from Tenet's Chicago market. Tenet also declined to address regional restructuring.

But multiple sources within DMC and close to Mullany have confirmed the reasons and plans Tenet has for DMC.

Mullany declined to comment on the circumstances surrounding his departure. He said he has talked with two health care companies and is considering a new position with one of them.

"DMC is a fantastic academic medical center filled with great caregivers," Mullany said. "I am so proud of my five years there. With the strong team in place I know they take the medical center to even greater heights."

But sources said it is unclear if the current management team will remain in place or in what capacity. It is also unclear whether Tenet will continue to invest in capital improvements at DMC at the levels it has the past several years.

Over the past 18 months, Tenet has been cutting costs and selling assets in an attempt to stop the freefall of its stock price, which has tumbled to around $20 from about $60. While its outpatient and data consulting subsidiaries are profitable, hospital operations have dragged down its operating margins below that of any other large investor-owned chain. In addition, Tenet also in October reached a settlement under which it will pay more than half a billion dollars to resolve a federal criminal and civil investigation tied to kickbacks involving Medicaid.

Last week, Tenet CEO Trevor Fetter announced Tenet would sell an unspecified number of noncore hospitals and its home health and hospice business line to raise capital. It recently sold its four Georgia hospitals for $661 million.

"DMC was doing well financially — hit all the numbers, but Tenet wants more cuts," said a physician manager at DMC, who asked to remain anonymous. "DMC's numbers look good, but the cuts (coming) in Detroit are not justified for fixing Tenet's problems in South Carolina and Florida. Detroit has a surplus and now inherits the debt from mismanagement from the South. Dallas (Tenet headquarters) has a double standard and takes Detroit market for granted."

Another DMC physician on its medical staff confirmed that Tenet wanted Mullany to lay off more employees and managers. The past two Decembers, DMC has laid off more than 200 employees, or 2 percent of its workforce, and decided to leave other positions unfilled.

"Tenet wanted Joe to cut more staffing and felt he spent too much money fixing the sterilization dilemma," said the first DMC physician. "He refused to cut medical administrative contracts (with Wayne State), which is the only way of protecting quality in the hospital.

"They (Tenet) fought with him to cut more staff, and that included medical directors," the physician manager said. "This will jeopardize quality. Medical directors look out for patients — not cost. They want less medical directors so they can dictate more cost-cutting without interference. The medical director is only person who truly protects patients."

Several sources said Tenet also was upset that Mullany and DMC staffers negotiated a higher price for medical administration with Wayne State than they felt was necessary. Last September, DMC and Wayne State agreed to an 18-month clinical and administrative contract that apparently both sides were unhappy with in the end.

"We had to do it," said the DMC management source of the contract. "We need sufficient physician oversight of departments and clinical care."

The Detroit News reported Thursday that DMC reported another incident of a dirty instrument to the Michigan Department of Licensing and Regulatory Affairs. The dirty instrument was discovered Dec. 23 by a surgeon at DMC's Children's Hospital of Michigan. The report wasn't submitted to the state until Jan. 13.

Sources told Crain's that the dirty instrument at Children's Hopsital was one of several discovered over the past several months. In all instances, however, the instrument wasn't used in the planned surgery, sources said.

"DMC self-reported to the bureau an incident where a sterile surgical pack was not properly processed and screened on Dec. 23," said LARA in a statement to Crain's. "Once the bureau's thorough review of the information is complete it will determine the next course of action."

On Dec. 22, however, LARA found "DMC to be in compliance with the state and federal statutes and the public health code." A consultant hired by DMC, CleanStart Surgical of Plymouth Township, submitted a report to LARA on Dec. 16. CleanStart is no longer monitoring DMC, but it is believed its recommendations on improvement have largely been implemented.

"We pushed for more" spending on sterile processing, said a third DMC management source. "They (Tenet) thought we went too fast. Some expenses (allocated) won't continue."

However, DMC and Tenet may be forced to increase expenditures to improve sterile processing, if LARA conducts a followup inspection based on the new revelations and mandates further improvement.

Marjorie Mitchell, executive director of the Michigan Universal Health Care Action Network who was an outspoken critic of the sale of DMC to Vanguard, said the problems DMC has with sterilization of instruments require the state to take action.

"I think the situation requires ongoing state oversight for the foreseeable future to reassure the public that the problem is, indeed, solved," Mitchell said.

Donna Stern, labor union chair with AFSCME Local 140 for Children's Hospital, said central sterile processing at DMC is understaffed and continues to have problems because of lack of administrative and technical equipment support.

"The problem of dirty instruments ... occurs at many hospitals but goes unreported and cannot be solved by subcontracting, which always results in further cutbacks in pursuit of profits," Stern said in a statement.

"We need more workers who are given adequate time and resources to do their job, and an adequate stock of instruments and functioning equipment to maintain a ready supply of clean instruments for the OR, without workers being rushed to do quick turnover. What we don't need is medical care on the cheap and blame shifting — neither of which will provide the care patients deserve."

In a statement, DMC said: "An instrument that had been inadequately cleaned was identified in an operating room at Children's Hospital of Michigan. While the instrument was not used during the surgery, the surgeon notified the patient's family. As part of our ongoing performance improvement efforts, we are reviewing the circumstances surrounding the event."

Sources told Crain's that DMC is aware of ongoing problems with cleaning surgical instruments and knows several other instances in which dirty instruments were discovered in the minutes before a surgery.

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Trevor Fetter

Tenet restructuring ongoing

Several sources said Tenet is in the process of consolidating its 13 markets and regional offices as a cost-cutting and streamlining move. Tenet owns 70 hospitals in 14 states, including Florida, Texas and California, and has an additional 20 short-stay hospitals and 470 outpatient centers.

"Tenet plans to merge the Detroit market and have it report to Birmingham (market), which will control multiple markets and regions," the DMC management source said. The Birmingham, Ala., market includes 610-bed Brookwood Medical Center in Birmingham.

Two DMC sources said Tenet is also considering selling its four-hospital Chicago market as part of an announcement earlier this month by Fetter that the company will sell noncore hospitals. Fetter did not specify which hospitals are for sale, although sources said the company has several letters of intent it is considering.

Capital spending at DMC could be on cutting block

Sources said that Tenet may cut back on routine capital maintenance spending at its DMC hospitals.

"Another big issue (under Mullany) was that the capital budget was cut to $6 million from $70 million a year," said the DMC management source.

Under the terms of the sale of nonprofit DMC in 2011 to Vanguard Health System, Vanguard and later Tenet, which acquired Vanguard in 2013, was required to spend $500 million on specified capital projects and $350 million on routine maintenance or capital projects over five years.

"It completed its commitment for the $350 million in 2015, and they are not required to report any longer," said Walsh, noting that the Legacy board is concerned that DMC could slow necessary maintenance expenses.

Walsh said Legacy failed to reach agreement with DMC on continued reporting for 2016 and 2017 on routine capital maintenance. He said DMC continues spending to complete the Children's Hospital tower, the last major specified capital project.

"The $350 million over five years amounts to $70 million per year," Walsh said. "They got behind (for two years), but spent nearly $240 million in 2015 to nearly catch up. The board was happy but concerned because DMC did it in a strange way and felt they might starve the hospitals going forward on capital spending."

Walsh said his concerns mirror those of the Legacy DMC board. "There is a risk that adequate capital expenditures to maintain the hospitals could be cut. There is a minimum $50 to $70 million needed annually just for break and fix repairs."